What the Facebook IPO Debacle Doesn't Tell Us

Ross Douthat shares my personal visceral dislike for Facebook, but I'm afraid he's let this warp his analysis of the economics of Facebook. For those note really paying attention, the issue is that Facebook went public last week, meaning it's shares were made available for the public to buy and sell on the stock market. Shares were initially sold at a price of $38, which meant the company was worth $104 billion. But after a week of public trading they had fallen to just under $32, for a market value of $87 billion. What this tells us, according to Douthat, is that Facebook is a failure as a business model, and so too is the entire internet:

But even readers who love Facebook, or at least cannot imagine life without it, should see its stock market failure as a sign of the commercial limits of the Internet. As The New Yorker’s John Cassidy pointed out in one of the more perceptive prelaunch pieces, the problem is not that Facebook doesn’t make money. It’s that it doesn’t make that much money, and doesn’t have an obvious way to make that much more of it, because (like so many online concerns) it hasn’t figured out how to effectively monetize its million upon millions of users. The result is a company that’s successful, certainly, but whose balance sheet is much less impressive than its ubiquitous online presence would suggest.

The relevant number here is not how much the perceptions of Facebook's value changed over the week, but current value of the company. Ross judges Facebook as not making "that much money", and that "Twitter is not the Ford Motor Company; Google is not General Electric". And technically he's correct, as G.E. has a market value of $203 billion, and Google's is $193 billion. So Google isn't quite G.E., but it's actually very close. Furthermore, Google's value is nearly five times Ford's paltry $40 billion. So Facebook is actually worth twice as much as Ford, and more than Ford and GM combined. Contra Ross, the takeaway here is that the economic value of Facebook is a little less than people thought in the beginning of the week, but still an awful lot.

What about jobs? Ross complains that Facebook, and the internet sector in general, don't create many jobs. But as Enrico Moretti emphasizes in his book The New Geography of Jobs, the importance of the innovation sector is not just how many jobs they create directly, but how many jobs they create indirectly. Most of the jobs in an economy are local services. Increasing earnings in innovation and other tradeable sectors raises spending in non-tradeables sectors like services, and thus increases jobs and wages there. People sometimes dismiss talk of indirect jobs as PR, and done incorrectly it sometimes is, but Moretti is a serious academic economists and he is correct here. His research suggests that every new manufacturing job creates 1.6 jobs in the local service economy. But in the innovative sector the corresponding effect is more than three times larger.

Moretti emphasizes this point by pivoting off of a claim often made by those who praise manufacturing for it's job creating:

Ron Bloom, President Obama's former manufacturing czar, like to say, "If you get an auto assembly plant, Walmart follows; if you get a Walmart, an auto assembly plant does not follow." He is correct: the manufacturing sector does generate local service jobs too, and this is a major benefit for communities. But he misses the fact that if a community were to attract an Internet of a biotech company of similar size, the effect on job creation in the service sector would be even larger. Not only would it create three times as many jobs, but those jobs would be better-paying than Walmart jobs.

What I mostly see in Ross' comments on Facebook is the common romanticizing of manufacturing, some visceral dislike of Facebook (which I share), and an inexplicable and inconsistently high bar and for what constitutes an economically valuable business and industry.